Wednesday, March 21, 2012

It's The Economy Stupid: Bridgewater Commentary

 

Bridgewater Associates is an investment management firm founded by Ray Dalio. The firm serves institutional clients including pension funds, endowments, foundations, foreign governments and central banks.  It utilizes a global macro investing style based on economic trends, such as inflation, currency exchange rates, and U.S. gross domestic product, and many more. It’s quantitative approach is augmented by an ‘open dialogue’ (it ain’t a polite conversation) approach in its investment research meetings.  The firm's history includes the pioneering of industry strategies such as: currency overlay, the separation of alpha and beta strategies, the creation of absolute return products, and risk parity.  Its assets under management have increased by 25% each year during the last decade. The company’s Daily Observations research is reportedly read by leaders of central banks and managers of pension funds around the world.  I sure as hell do.

 

Love them or hate them, Bridgewater is one of the foremost ‘hedge’ funds in the world. Depending on whose numbers you believe, they are the world’s largest.  Their Daily Observations is a must read for anyone in asset management.  You might not agree with everything they say, but I wouldn’t bet the house against them.

 

Their view of the economy and the timing of a change in interest rates by the Fed should be taken seriously.

 

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From Bridgewater Daily Observations on March 21, 2012:

 

The US economy is currently passing through the cyclical sweet spot where strong growth rates can persist without prompting tightening.  The US economy is growing faster than capacity and continues to use up the excess capacity created by the financial crisis.  Capacity in production has tightened more than capacity in the labor markets.  This cyclical improvement has contributed to a normalization of core inflation rates and inflation expectations.  As discussed previously, effective monetary policy during a deleveraging should be easy enough to allow nominal growth that gradually eases the deleveraging, but tight enough to prevent either an unacceptable rise in inflation or the reflation of the debt bubble.  Cyclical conditions may now be on a path where tightening may be needed in about a year, which is significantly faster than currently discounted.

 

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In other words, the economy is growing, its picking up momentum, and the Fed will probably have to begin raising rates in about a year.

 

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

Ph:  225-342-0013

Fx:  225-342-9721

Email:  jbroussard@treasusry.state.la.us

 

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